Urgency required

It might be the opportunity of a lifetime: cheap money, cheaper houses and a tax credit. Young or old, people who rent their home should be plotting and planning with a sense of urgency the purchase of a house.

Mortgage interest rates are lower than they have been for at least 40 years. The interest rate on my first mortgage in 1982 was 9 5/8%, and that was low at the time. My mother was a Realtor and found some bond money which provided a reduced interest rate for first time homebuyers. Everybody else was borrowing with mortgage rates around 13%. Today the rates are the lowest I’ve ever seen them. Mortgage interest rates recently have been below 5%. Today they are a bit above 5%, but that is still historically low. I am not a pessimist or an economist, but does anybody really expect interest rates will stay this low for long? How many zeros are in the projected Federal budget deficit? Think inflation.

In dollars, what is the difference between a mortgage interest rate of 5.25% and 6.75%, the latter rate being a more common interest rate in recent years? If the original loan amount was $150,000, the interest rate was 6.75%, and the loan was paid back over 30 years, you would pay $52,053 more in interest expense over the life of the loan than if the interest rate was 5.25%. Looking at it another way, if you qualified for a monthly payment of $1,000 per month (excluding real property taxes and insurance), you could borrow $181,093 at 5.25% or $154,178 at 6.75%, a difference of $26,915. The difference is significant for most people.

Another reason renters should be looking for a house is the real estate market is a buyer’s market. Although the Fort Smith/Van Buren real estate market has not been as bad as the real estate markets in California, Nevada, and Florida, it is still a buyers market. A buyer’s market means more house for the money when compared to a seller’s market.

One of the greatest obstacles for some people in buying a house is coming up with the down payment. If you don’t have enough money to make the down payment, someone in your family does. Have them gift you the down payment. You will only need 3.5% of the cost of the house if you can qualify for an FHA loan. How will you pay them back? With the money you receive from Uncle Sam when you get your first-time homebuyer tax credit. (If nobody in your family likes you ask a friend or investigate borrowing from your retirement plan at work.)

There has been much in the news about the first-time homebuyer tax credit, but there still seems to be a lot of confusion. It’s not that difficult to understand (wink). Here it is in a nutshell.

• A first-time homebuyer of a principal residence gets a credit of 10% of the purchase price of the residence but the credit cannot exceed $8,000.

• A first-time homebuyer is not always a first-time homebuyer. A first-time homebuyer is an individual (and if married, such individual’s spouse) who doesn’t or hasn’t had an ownership interest in a principal residence during the three-year period ending on the date of purchase of the new principal residence.

• The tax credit is a refundable credit. A refundable credit is treated the same as a tax payment. If you qualify for the full $8,000 credit, you will get an $8,000 refund even if you didn’t owe a dime of income tax and even if you hadn’t previously paid a dime of income tax through estimated tax payments or withholding. It is free money if you qualify for the credit.

• The credit is reduced if you make more than $75,000 ($150,000 if married and file jointly) and is completely phased out if your income exceeds $95,000 ($170,000).

• You can’t buy the principal residence from a related person. A related person is a spouse, grandparents, parents, or children.

• If two or more unmarried people purchase a principal residence together, the credit can be allocated between the new owners using any reasonable method.

• You have to maintain your principal residence in this new house for a period of 36 months. Failure to do so kicks in a recapture provision which means you will have to pay back part if not all of the tax credit you received.

• You have to purchase this home before December 1, 2009. The means your closing, the signing of the legal documents transferring ownership to you, must happen on or before Nov. 30, 2009.

Hence the feeling of urgency. If you have never bought a house before you need to know it takes time. If you want to take advantage of the first-time homebuyers tax credit you have less than six months from today to complete the purchase. You have less than six months to find the right house, make an offer that will be accepted, apply for a mortgage, find any lost W2s or information the mortgage company needs from you, correct any credit bruises, and close on the house. Six months isn’t as much time as you think. I expect a lot of people will miss this historic opportunity. Don’t be one of them. Get started. Time is running out.

David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas at Fayetteville. You can follow his blog at ThePottsReport.com.

Potts can be reached at [email protected]